Rick Allen, chief operating officer, MortgageMarvel.com and Joe Parsons, senior loan officer, PFS Funding, explained the way lenders arrive at a bottom line and how you can comparison shop.

Q. What causes these variances?

A. There are several factors that cause variations in closing costs from lender to lender. First, each lender sets its own administration and underwriting fees to cover overhead expenses. These fees are passed on to the borrower and can vary widely, so that accounts for some of the differences in closing cost estimates.

Lender fees come in two different forms: fixed amount fees like processing or underwriting fees, and fees that are a percentage of the loan amount, which are typically origination fees. When combined with the profit a lender may make on the sale of the loan into the secondary market, the fees are designed to cover overhead costs and produce a profit. Lender fees can vary widely because lenders have different income expectations, pricing approaches and fee structures.

Lenders also work with different third-party providers for services like title insurance, credit reports, flood certifications, and appraisals. The fees that different lenders negotiate with these providers can vary, which means the amount charged to the consumer will vary.

Finally, the approach that lenders use for estimating fees can vary. At the time of a rate quote, and even when an application is submitted, there are things about the transaction that affect fees that the lender may not know. For example, the exact closing date will affect the amount of interest that must be paid at closing. Lenders take different approaches for estimating such costs. (Allen)

Q. Is the lowest closing cost always the best way to go (if the quoted rates are equal)?

A. If the product, interest rate, and discount points are equal, the next thing a consumer should compare are the closing costs. The annual percentage rate can be a good indicator of the level of closing fees, but does not factor in all closing fees. Consumers really need to look at the closing fee detail and compare it across lenders. If one lender's lender fees are higher than another, the one with the lower lender fees is probably better. But you also need to look at the other fees and try to understand which fees are standard across lenders, like recording fees and taxes, and which fees may vary from lender to lender because of negotiated rates, like settlement fees and appraisal fees. (Allen)

Q. What should consumers ask for in writing up front?

A. By law, lenders are required to give you a good faith estimate of closing costs within three business days of your applying for the loan. If you don't receive this, you may want to look for another lender.

Keep in mind, though, that by law, some of the fees listed on the good faith estimate can vary by as much as 10 percent when the actual closing takes place. This might happen because the lender cannot exactly estimate the related fee without knowing more information about your transaction.

If you apply online, it is very important that you look at the site's policy on closing costs. (Allen)

In addition to the good faith estimate, you should ask for an initial fees worksheet and ask if your rate can be locked today. (Parsons)

Q. Is there anything in the law for 2013, either on a national level or in California, that will change anything related to closing costs?

A. There is nothing that would cause any changes in closing costs for 2013. With that said, individual lenders have the ability to change their costs, as for underwriting and document preparation. Those costs are passed on to the consumer. By the same token, title companies, which are regulated in California by the insurance commissioner, can change their rates after getting clearance from the Commissioner. Escrow fees (especially those charged by companies that do only escrow, not title companies, can charge whatever they wish.

In many cases, lenders selling properties insist that the buyer use a certain escrow company. In these cases, the bank/seller is typically giving the buyer some sort of credit for closing costs, but sometimes the fees we have seen for these kinds of companies are outrageous.

For purchase transactions, some of the highest amounts of closing costs are for "prepaids:" pro-rated interest, homeowner's insurance premium and setting up the impound account for taxes and insurance.

Other fees, like appraisal and notary, can and do change. Under today's set of rules, the cost of a typical residential appraisal has risen to around $440 from around $300 just a few years ago. There are no limitations on those costs.

One thing to keep in mind is that for those loans done by brokers, the compensation paid by the lender has to be disclosed at the top. Depending on the rate chosen by the borrower, there will be a rebate from the lender to pay some or all of that fee. (Parsons)

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